Stocks vs Real Estate

The comparison is often made between investing in Real Estate vs investing in the Stock Market.   There are many strong points to both arguments, but as an Investment Advisor, I am going to argue the side of why the stock market is a better long term investment.  Note, I am not inferring you should not buy a home, nor am I inferring that you should exclusively put all of your money in the stock market.  This argument is just in terms of where you should put extra money that you would like to grow for retirement or other purposes.

Here are 6 advantages of investing in stocks over investing in real estate.

1.Effort/Work

Whether you are flipping homes, renting properties, or developing land, there is a whole lot more hands on work and extra time as compared to ownership of stocks.  If you have an investment advisor, you could realistically spend absolutely no time “working” on your stock ownership and still get the growth of the market.   Lucky for you, stocks don’t have furnaces that break, or water pipes that leak.

2. Diversification

Diversification is a very important concept.  The old saying is don’t put all your eggs in one basket.  Diversification in Real Estate would involve buying homes, apartments, commercial property, and farm land etc., all in different areas of the country.   You would have to have quite a bit of money to be fully diversified.  With the stock market, if you are invested in a Matson Money Fund, you can start with one dollar and be invested in about 12,000 stocks throughout the world.

3. Liquidity

Liquidity is how easy it is for you to sell.   Stocks are extremely liquid, with most stocks being sold within seconds of offering them for sale.   With Real Estate, it can take weeks, months, or sometimes years to sell or rent out a property.

4. Costs

The cost of owning property could include all or most of the following; real estate agent fee, property taxes, maintenance, utilities, mortgage interest, and insurance.   The cost of owning stocks usually only includes an investment advisor fee, and mutual fund management fee.

5. Debt

When investing in real estate it is almost always tied to taking on debt, because of the large amounts of money needed to buy a property.   Taking on debt automatically increases the risk level with any investment.   With stock based mutual funds, you can start with $1, and never have any debt to worry about.

6. Return

There is a lot of variables that come into play when comparing returns of real estate investing vs stock based mutual funds.  You can really cherry pick numbers to make either side look much better than the other.  Just comparing actual long term growth in prices of real estate vs prices of stocks, stocks win that competition easily.  But if you include rental income, it can obviously increase your overall real estate investment return. With that though, you have to consider the risk of not being able to rent it out.

If you are looking for a way to get a high return with lower risk and little hassel, my opinion is that your #1 option is to put your money in stocks, via a diversified Roth IRA or 401k.

Feel free to comment with your thoughts.

By Jimmy Hancock



References

  1. Kennon, Joshua. “Should You Invest in Real Estate or Stocks?” The Balance. N.p., 17 Oct. 2016. Web. 12 May 2017.

Large Stocks vs Small Stocks: Does the Last 3 Years Change Things?

Looking back at the last few years, small stocks have been under performing by a big margin compared to large stocks.   Is this just a short term fad or is this a bandwagon that you need to jump on?

The S&P 500 is a grouping of the 500 largest companies in America.  It is a very popular thing to invest in for many reasons.  First of all, it is made up of incredible companies that we all know and love like Google, Walmart and Apple.

Here is a chart showing 2017-2019 average annual returns from these different US stock categories.

 US Markets Annualized Return (%)
S&P 500 Index 15.27%
Dimensional US Large Cap Value Index 8.46%
Dimensional US Micro Cap Index 6.85%
Dimensional US Small Cap Index 6.75%
Dimensional US Small Cap Value Index 3.32%

Obviously the S&P 500 has done amazing, while the other categories have done below their long term averages.     This can sometimes lead to a problem called recency bias.   Recency bias is a form of timing the market and investing in what has done well recently.   We believe it can be detrimental to your long term investment strategy.

Different categories of stocks have returns that come at different times and for different reasons.   Our main job as investment coaches is to keep you diversified and disciplined during crazy times like this.   This has happened before, and it looked almost the same as it does in the chart above.

From 1995-March of 2000, the S&P 500 was the best category of stocks by a wide margin.  The next closest category was over 4% lower annually, with most of the other categories being 14% or more lower annually vs the S&P 500 during that time.     Then for the next 10 years starting in march of 2000, the S&P 500 was the only stock category that had a negative return.   Yes, it lost money over a 10 year period.  But International Small Value stocks were up over 14% per year during that same period and US Small Value stocks were up  over 11% per year.

The stock market is random and unpredictable in the short term.  It really does take patience to be a successful long term investor.  I know, just like you, how frustrating it is to see other people having great returns while I am not.

Below is a chart showing a longer term history, and the returns of each category, including international categories from march of 2000-through the end of 2019.

Markets Annualized Return (%)
Fama/French US Small Value Research Index 10.75%
Dimensional International Small Cap Value Index 10.51%
CRSP Deciles 9-10 Index 8.81%
Dimensional International Small Cap Index 8.79%
CRSP Deciles 6-10 Index 8.32%
Fama/French International Value Index 7.53%
MSCI Emerging Markets Index (gross div.) 6.99%
Fama/French US Large Value Research Index 6.76%
Dimensional International Large Value Index 6.14%
S&P 500 Index 6.01%
MSCI EAFE Index (net div.) 3.36%

You can see that the S&P 500 has been the second lowest category over this last 20 year period.

We keep our clients invested in the S&P 500, but we overweight towards small and value, because their long term returns have been higher.

Although the S&P 500 is popular, and has been up lately, that doesn’t mean you can forget the long term projections and academic studies that have proved again and again that an efficient diversified portfolio beats the S&P 500 in the long term.

By Jimmy Hancock

References

  1.  Matson Money. Three warning signs you may be speculating and gambling with your money powerpoint. N.p.: Matson Money Inc., 29 June 2020. PPT.

Quarter 3 Stock market Update

The following is from Matson Money Quarterly Statements.  It is a good reminder to focus on long term historical returns rather than panicking about short term returns.

“The 3rd quarter of 2018 saw domestic equity markets hit all-time highs, meanwhile outside of the U.S., the decline in international markets that persisted in the first two quarters of the year, stalled out and various  international asset classes achieved positive returns. U.S. stocks rose by 7.71% for the quarter as represented by the S&P 500 index, while  international stocks as measured by the MSCI World Ex-USA Index returned 1.31%. Large cap value stocks gained momentum, after going into negative territory earlier this year, and moved higher to the tune of 5.7% as measured  by the Russell 1000 Value Index.

2018 thus far has seen a divergence in the performance of domestic equities vs international stocks. While domestic equities are hitting all-time highs, international stocks have seen a decline from their performance in 2017. The  myopically focused nature of mainstream media and market watchers seem to just focus their attention on one index to represent the investment landscape, the S&P 500. In the good times, investors seem to compare their  diversified portfolios to the S&P 500 and get frustrated when they can’t keep up. You’re hearing stocks are at all-time highs so why isn’t your portfolios  at an all-time high as well? Its important for investors to understand this is an  apples to oranges comparison. A sound investment solution involves diversification and not just in the U.S. equity markets but international ones as  well. It involves owning stocks that have low correlation to one another so that when one goes down, another one does not go down as much. It’s not fair to  tell yourself, “if only I owned more U.S. Large Cap (S&P)” There are  many other asset classes in the world that have historically done better than the S&P 500, however they are not the ones being referenced on your nightly  news show.

To highlight the benefits of global diversification, let’s look back to 1970 and examine the relationship between U.S. stocks, as represented by the S&P 500 Index, and international stocks, represented by the MSCI EAFE Index. From 1970-1989, international stocks outperformed the U.S., then from 1990-1999, U.S. stocks outpaced international, then from 2000-2017, international stocks outdid the U.S. These decade-long tradeoffs in  performance is exactly why clients need to stay focused on their long-term investing goals and remain diversified. Developed countries have similar long- term expected returns, but as the data has shown, they achieve these returns at different times. Over the entire period, 1970-2017, the S&P 500 average annual return was 11.95%, while the MSCI EAFE index had an average annual  return of 11.78%. They each took different routes to get there, but in the end, they achieved a similar result.

In the end, choosing a wise financial strategy -and sticking to it -can have  tremendous impact on an investor’s long-term financial health. Chasing performance through buying and selling is a risky game. Historically speaking, it can reduce an investor’s real return. Relying on unbiased, non-emotional advice from a trusted investor coach to make good decisions can help an investor bridge that gap between what the average investor makes and the return of the market. ”

Reference

  1. Matson Money. “Account Statement.” Letter to James Hancock. 15 Oct. 2018. MS.